Posts tagged with: debt

Despite Greece being the current poster child for sovereign debt, national debt crises are nothing new and won’t be going away anytime soon. Governments habitually solicit capital loans only to default. In a new article for Public Discourse, Samuel Gregg discusses not only Greece, but also some of the deeper issues surrounding sovereign debt crises. He asks:

What is the most reasonable framework through which governments should try to address such matters? Should they try to resolve them through appeals to necessity and pragmatism? Or should they seek more principled approaches that take justice seriously? If so, where may such methods be found?

When facing these financial woes, governments often turn to–what some would consider–justifiable, but unethical solutions:

About twenty years ago I made some terrible choices and found myself in a serious financial bind. The amount I needed wasn’t much — about $200 — but without it I wouldn’t have been able to pay my rent. I took out a payday loan that cost me $30 every two weeks. It took about eight weeks to get clear of the loan, resulting in a cost of $120 to borrow $200 for two months.

Was I fooling myself thinking the loan could be paid in two week? Not at all. In fact, I knew quite well that there was likely no way possible for me to pay it off in that timeframe. I knew precisely how much money I was going to be able to earn and how much my expenses would be during that two-week period. I had, roughly speaking, about $40 a week that I could apply toward the loan.

But $40 was not sufficient to cover the balloon payment of $200 that was due at the end of two weeks. So I had to roll over the loan, applying $15 a week to the new fees and saving $25 a week to be paid toward the principal. That is why it took me eight weeks to pay off the original loan: $25 a week for principal + $15 a week for fees = $40 x 8 weeks = $320 ($200 for principal + $120 for fees.

If you’re middle class and think of it in terms of interest rate, that repayment cost sounds appalling usurious. And it is. But as the poor will tell you, man does not live on APR alone. Having to pay an extra $120 was cheaper than having to find a new place to live. Yes, it was a bad deal. But it was better than all my other choices. I didn’t agree to the loan because I was bad at a math; I did it because I was desperate. And the payday lending company was more than willing to take advantage of my desperation.

How then do we solve the problem of rollover fee that take advantage of the poor when they are in dire straits? As I’ve argued before, I believe a helpful first step is to get churches and other faith-based organizations involved in providing alternatives to commercial lending agencies. The Worship Center Christian Church in Birmingham, Alabama seems to be providing a wonderful example of how Christians can help.

This past Sunday the church announced it will pay off the payday loans of 48 people — a combined total of more than $41,000 on high interest rates of 36 percent or higher.

For decades The Episcopal Church (ECUSA) has faced declining membership (in 1966, the ECUSA had 3,647,297 members; by 2013, the membership was 1,866,758, a decline of 49 percent.) But even when people are leaving the pews someone still has to pay for those pews, as well as the other overhead costs that come with running a large organization. Not surprising, the denomination has sought ways to bring in additional revenue.

Currently, the ECUSA has two primary sources of income. According to its latest audited financial statements for the calendar year 2013, it received a little over $27 million from its member dioceses, and it received half as much again, or $13.8 million, from the federal government.

As A.S. Haley notes, the money ECUSA received from the federal government was in connection with the services provided by Episcopal Migration Ministries, which assists the State Department in relocating refugees throughout the United States. That is certainly noble and necessary work, and the denomination should be commended for providing a valuable service to a vulnerable community.

But as Haley points out, the records show the ECUSA also makes a lot of money as a debt collector:

Near the top of the list of things I despise is companies that take advantage of the plight of the poor and desperate. But just above that on my list is something I hate even more: being poor and desperate. That’s why I loathe payday lending companies that charge usurious interest rates—and why I’m not yet ready to see them abolished.

Here’s how payday lending works. If you have a job (and pay stub to prove it), a payday lending company will allow you to write and cash a post-dated check. For this service the company will charge an absurd interest rate. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. So if you need $100, you write the check for $115 and they’ll give you $100 in cash. Two weeks later they cash your check or you can renew or “rollover” the amount—for an exorbitant fee.

Why would anyone agree to such terms? Because they have no other choice. About twenty years ago I made some terrible choices and found myself in a serious financial bind. The amount I needed wasn’t much—about $200—but without it I wouldn’t have been able to pay my rent. I took out a payday loan that cost me $30 every two weeks. It took about eight weeks to get clear of the loan, resulting in a cost of $120 to borrow $200 for two months.

If you’re middle class and think of it in terms of interest rate, that repayment cost sounds appalling usurious. And it is. But as the poor will tell you, man does not live on APR alone. Having to pay an extra $120 was cheaper than having to find a new place to live. Yes, it was a bad deal. But it was better than all my other choices.

That is why I believe every serious critique of payday lending needs to be accompanied by a serious proposal to help those who are trapped by such “poverty problems.” An excellent example of an alternative approach is the one offered by Wesley Memorial United Methodist Church in Richmond, Virginia. One of their church members, Nina McCarthy, was initially trapped in the vicious payday lending circle:(more…)

Usury is the practice of making immoral monetary loans intended to unfairly enrich the lender. But what, for Christians, counts as an immoral loan?

For much of church history, any interest was considered immoral. The 12th canon of the First Council of Carthage (345) and the 36th canon of the Council of Aix (789) declared it to be reprehensible even for anyone to make money by lending at interest. But that view eventually changed, and today even the Vatican participates in modern banking.

To add to what I say there, it should be a far more pressing concern to conscientious citizens that the US national debt has risen from $13 trillion in 2010 to nearly $18 trillion today. That is an increase of $5 trillion in just four years, or a nearly 40 percent increase. It is becoming more and more clear that, at our current rate, our nation’s entitlement programs represent the injustice that people today feel entitled to spend the tax dollars of tomorrow on benefits that we cannot realistically continue to afford. John Barnes wrote in 2010 that “the total value of all debt and unfunded promises made by the U.S. government is $61.9 trillion over the next 75 years.” I don’t know how much that figure has changed in the last four years, but I doubt it has shrunk, to put it lightly.

As any student of the Old Testament should know, God is very concerned about each generation leaving a proper inheritance to the next (cf. Numbers 27:8-11). No doubt many readers in their private lives have made provisions for their children after they pass. But as a nation, we are doing the reverse: paying for our provision today with the resources of tomorrow.

I write,

The German economist Wilhelm Röpke, commenting on the expansion of European welfare states in 1958, wrote, “To let someone else foot the bill is, in fact, the general characteristic of the welfare state and, on closer inspection, its very essence.” While he did not argue that, therefore, such state assistance should in all cases be stopped, he put the question in sober terms: “[T]he welfare state is an evil the same as each and every restriction of freedom. The only question on which opinions may still differ is whether and to what extent it is a necessary evil.”

In the interest of carrying on that same sobriety of analysis, I believe the picture is far bleaker today. Röpke, in the title to the essay quoted, characterized the welfare state as “robbing Peter to pay Paul.” But Sts. Peter and Paul were contemporaries. If only we would simply rob our peers! Then we could have a lively discussion regarding “whether and to what extent” such robbery is “a necessary evil.” Instead, it is our children and grandchildren who must “foot the bill.” Yet on our current course, when the time comes to pay up there will be much less welfare available to them.

From an economic perspective (from Pulitzer Prize economist Liaquat Ahamed) the European nations paid for WWI not with taxes, but with massive debts financed largely by America. The warring nations could not pay their way out of debt so many resorted to the easier route: inflation. But that inflation destroyed the savings of the middle class and that did not make European nations more stable.

Germany finally defaulted on its war debts after the 1929 crash. The international financial system also collapsed. Of course, German people listened to Hitler’s ideas about blame and solutions, while France, half destroyed by the war, looked at Germany (where few battles were fought) and wanted the Germans to pay for that destruction. The Depression made each nation more economically isolated which added to the misery as trade shrank. Europe was ripe for WWII.

WWI could be taken as a lesson on the perils of excessive debt. Governments have discovered three nasty advantages:

They can borrow beyond emergencies (war) to pay for anything.

Government pensions (more debt) are excellent ways to buy votes with the vague idea that ‘future growth’ or ‘future generations’ will easily cover the massive pension obligations.

Governments have more recently seen that they can lower interest rates and ‘print money’ without being held accountable as they will be bailed out by other countries through central banks which will do, as Mario Draghi famously said, “whatever it takes.” These financial gimmicks look like serious plans because the men wear suits and because their ideas work, at least until the office holders retire.

However, as with WWI debt and the Crash of 1929, a severe crisis will come and prove that these leaders (while possibly not as incompetent or corrupt as the political leaders of Detroit) were wrong.